This post will differ in two ways from the usual stuff you can find here on the blog. First it is obviously written in English and second that it’s not my typical net-net checklist analysis (although the company analysed is a net-net). The reason why I post this analysis in English is for my own personal developmet and me trying out if this is something I want to continue with. The reason why I depart from the checklist is because I think this case might be more attractive than the regular ones I usually analyse and also because it contains elements of a special situation. Enough talking, let’s get down to business to see what all the fuss is about.
A German nano-cap net-net with a catalyst hiding in plain sight
Let’s start off with what Google Finance has to say about HYI:
Hyrican Informationssysteme AG is a Germany-based company engaged in the manufacture and
distribution of information and communication technology systems as well as hardware and software. It also offers services in the field of system development and system consultancy. The Company’s product portfolio includes computers (PC), notebooks, servers, tablets and workstations for both the business and consumer markets. It also retails peripherals and accessories. In addition, Hyrican Informationssysteme AG’s products are available through its online shop. Its customers include mail-order companies, systems houses and electronic retailers. The Company cooperates with various partners, including Intel, Microsoft, Philips and Samsung, among others.
Sounds like the everyday dead money net-net right? In one sense yes, it’s a boring business model with no or limited growth prospects attached to its future. Over the last ten years the revenues have steadily been declining and are now (FY 2015) about half as much as they were back in 2006 (66,875 MEUR vs 29,965 EUR). If that would have been the whole story I would just have posted my regular checklist analysis. Don’t get me wrong though I still love the dead money net-nets!
The good stuff
I found the company through my regular idea process (screening) for net-nets. At a price of 4,60 EUR the P/NCAV was 0,87x. What caught my eye from the start was that this was a money making company with positive results at the bottom line for the last nine years with the exception of last year (2015). From my usual viewpoint the EV/EBIT5y and EV/EBIT10y multiples looked freakishly appetising: 0,6x and 0,2x. What got me even more excited was that the company’s current assets consisted almost exclusively of cash (about 64 %) and that P/Net cash was 1x. So this was not one of those net-nets where the validity of current assets might be questioned from the point of view that you were buying a big pile of old worthless computer stuff (about 16 % is inventory of total current assets) or that receivables (about 20 % is accounts recivables of total current assets) where too big of a chunk that you have to fear customers’ ability to pay up in the near future. Before we get into the interesting parts of this analysis let me just finish wrapping up the obvious positive bits of this small and very illiquid 22 MEUR German company. The company has no debt and a Z-score of well over 3 and positive retained earnings. Finally, HYI has continuously paid out a small dividend to its shareholders.
The bad stuff
In order for something to get really interesting you there has to be some bad stuff as well, right? In the case of HYI the bad parts consist of the management team and their actions over last couple of years. This case is a quite intimidating, so for those of you that thought SODI was improperly or non-shareholder friendly managed, you might want to sit down for this one.
In late 2011 and early 2012 the management team of HYI decided to issue some new shares. In a first round HYI issued 400,000 new shares for cash with the dilutive effect of 10 % (December 2011). The issuance was structured so that the none of the current shareholders (with one exception) where given rights to subscription. Then in January 2012 another issuance of shares was announced, now 450,000 new shares were issued. If I understand the structure behind the second issuance correct this was done in order to pay for the acquisition of Hyrisan Concepte und Systeme GmbH. The total dilutive effect for both issuances added up to 21 %.  Yes, that’s ugly in itself. But wait, it gets worse. The shareholder that acquired all of the above mentioned 850,000 shares was none other than the CEO Mr. Michael Lehmann himself. Before we go into the effects of this sneaky dilution scheme let first have a revisit to a historic event and look at what I think was the probable cause behind the scheme.
Just months before the dilution of the first 400,000 shares there was a change in the major shareholder structure of HYI. A former major shareholder (Peter Wicht) had in the end of October 2011 sold his former 32,5 % position to four parties.
- German Balaton Aktiengesellschaft, Ziegelhäuser Highway 1, 69120 Heidelberg, Germany
- VV Beteiligungen Aktiengesellschaft, Ziegelhäuser Highway 1, 69120 Heidelberg, Germany
- DELPHI Unternehmensberatung Aktiengesellschaft, Ziegelhäuser Highway 1, 69120 Heidelberg, Germany
- Wilhelm Konrad Thomas Tours, Werra Gasse 9, 69120 Heidelberg, Germany
If you do a little bit of digging and putting one thing together with another you will soon come to the conclusion that the four parties are in fact one. Yes, that’s right, Deutsche Balaton (DB) acquired the 32,5 % from Peter Wicht. So who is this Deutsche Balaton Aktiengesellschaft? They are an investment company whose shares are traded on the Frankfurt stock exchange. Before the transaction with Peter Wicht they were a shareholder of 25 % of HYI.
So now to the sad news for DB about the dilution scheme: two months after they become majority shareholders (57,5 %) HYI, or more correctly Mr Michael Lehmann, decides to dilute them so that they no longer are a majority shareholder. To make it worse, there is the second round of dilution which takes DB’s shareholding down from 47,5 % to 36,6 %. But wait, Mr Lehmann is not done jet. What I haven’t mentioned so far is Mr Lehmann’s shareholding position pre-dilution. Before Peter Wicht sold his stake in HYI both he and Lehmann had the same size of ownership, 32,5 %. According to a news article from The Spiegel Peter and Michael where the founders of HYI and had known each other since the nineties. Lehmann being the strategist and Wicht the engineer. With the dilution scheme put in place Lehmann now became the majority shareholder of HYI (57,5 %). Well played sir, well played!
So what does Deutsche Balaton do would you guess? Yes, that’s right, they sue Mr Michael Lehmann (management board) and the supervisory board for the dilution scheme. After about two year, in April 2014, the judge of district court of Erfurt comes with a judgement in favour of DB. The dilution was deemed illegal. HYI of course appeal but in April 2016 and in the second instance the legal opinion stays unchanged. The second instance also says no to a HYI appeal in a higher instance. For a overview of the the legal claims, DB has summarized all of this (although only in German) on their website in a pdf document.
A catalyst hiding in plain sight
Before we go into what I think is a catalyst hiding in plain sight let’s just recap. We have from a pure numbers point of view an attractive net-net. Management has for the last years obviously and sadly acted in a fraudulent and non-shareholder friendly manner. A large shareholder (DB) has taken an activist role and still has an ongoing fight for control over the company.
So what’s the catalyst then? There are actually two catalysts but they both have to do with Deutsche Balaton gaining majority power over HYI:
- As I have presented above DB has been a shareholder for a long time. They have also been very persistent in their role as activists. What I didn’t mention above is that there is also an ongoing court battle for the rescind of the two capital increases. This dispute is currently being conducted at the District Court of Erfurt and is not yet decided. With the fact that the two capital increases have been deemed illegal in two instances I see no reason why this dispute shouldn’t also be deemed in DB’s favour. If that should be the case, then DB again stands as majority shareholder.
- When HYI and Lehmann decided to try to push DB out of the picture back in 2011/2012 DB didn’t just sue the company. During the period 2012-2014 DB has made in total six acquisition offers for a varying number of shares in HYI. The price DB have been willing to pay has varied from 4,50-9,00 EUR (a premium to the stock price at that point in time). Due to the liquidity and free float of the company the number of shares actually acquired by DB this way has been somewhat limited. If my numbers are correct of DB’s shareholding post-dilution (36,6 %), then according to DB’s website where a shareholding of HYI is stated to be 44 % (2,134,000 shares), they have in total managed to acquire 7,4 % by public purchase offers. A positive conclusion for minority shareholders is there has been a few spikes in share price each time these offers have been published. Although not very likely the way I see it, the 6 % left to for DB to acquire might result in future purchase offers above current share price.
To summarize the catalyst situation: The way I see it, DB will likely become majority shareholders of HYI. It’s just a matter of time. With DB in the driver seat there will probably some changes, both in the way how ordinary business is run but also from a shareholder friendly deployment perspective on the 22 MEUR of cash HYI has accumulated over the years. To get a picture of how DB possibly will create shareholder value, my recommendation is to take a look at the document they published before the last annual meeting. There they made the proposal to raise the dividend from 0,04 EUR to 2,80 EUR.
HYI is one of those cases where there is a lot of noise around the company but it’s almost pure silence about the business itself. So my recommendation is to take one step back and put your earplugs in. HYI the way I see it a sleepy net-net but with a catalyst that with quite high certainty could spark flame to both its big cash position and share price. In a diversified portfolio of net-nets HYI is from my point of view a good addition.
I would though like to make a reservation for this case due to the fact that I’m not fluent in German. Although I understand most of it I have also used Google-translate for most part of the research. I therefore could have misunderstood parts and especially the details regarding the legal processes.
The company posted their half year “report” some weeks back. Unfortunately, it’s not much of a report but rather just a few sentences on the development of revenue and EBT. Compared to last year revenues are up about 0,7 % although EBT is down almost 18 %. So it looks like 2016 will be another bad year for HYI.
A person who spotted HYI when it was still seen as a non-fraudulent net-net was Nate at Oddball Stocks. I stumbled upon his analysis of the company from 2011 when I was writing up the final parts of this analysis. Although the situation has changed a bit I still recommend you reading it.
Disclosure: I’m long FRA:HYI when this analysis is published.